The need to save for retirement during one’s working years is essential to ensure there will be enough when the “golden years” arrive. Although most know they should be saving for retirement, there are often many challenges preventing them from doing so. While there are reasons why retirement savings may be delayed, the lack of access to plans and governing regulations can make participation difficult. Often times, Atlanta small businesses don’t have the financial resources to start, maintain and manage compliance requirements. This has left a large section of the population without a critical retirement savings vehicle. According to the U.S. Small Business Administration, companies with less than 100 employees are less likely to have a plan option similar to larger company counterparts. When a plan option is available, it’s projected that only 20% participate in the plan. To facilitate expanded benefit and saving opportunities, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act into law. The Act makes several changes to plan features and benefits designed to make it easier to access, participate in and expand saving opportunities. To help clients, prospects, and others, Windham Brannon has provided a summary of key changes below.
Key SECURE Act Changes
- Extended Contribution Opportunities – Given that many people are living longer than before, they are also working longer to ensure a healthy stream of income to their household. Recognizing this fact, the Act has created additional saving opportunities. Under prior regulations, an individual was prohibited from contributing to a traditional IRA after they turned 70 ½. The Act removed this limitation and allow individuals to make contributions to traditional IRAs regardless of age. It’s important to note the change does not impact 2019 contributions.
- Required Minimum Distributions (RMDs) – The Act also increases the age at which an individual is required to take minimum distributions from an IRA or another employer-sponsored retirement plan. Under prior regulations, RMD’s needed to be taken starting at age 70 ½, but the Act increased the age to 72. This change allows for retirement savings to continue to grow tax-deferred for a longer period of time. It’s important to note this only applies to those reaching age 70 ½after December 31, 2019. Given RMDs are typically taxed as regular income, this change may reduce taxable income for qualifying individuals in 2020 and beyond.
- Education Expenses – There are often life events that require individuals to rely on their retirement or 529 plans to resolve. Under prior regulations, taking a distribution from a 529 plan to pay qualified student loans or apprenticeship programs would be non-qualified distributions and result in a 10% penalty and income tax on the earnings. Under the Act, qualified student loan payments and apprenticeship programs would be considered a qualified distribution not subject to income tax or penalty for up to $10,000 per individual. It’s important to note there is a lifetime limit of $10,000 on these type distributions taken from a 529 plan. This provision is retroactive to distributions made after December 31, 2018.
- Early Withdrawal Opportunity – Often times people will elect not to contribute to a plan if a major life event is expected, including having a child. The Act goes one step further and permits a $5,000 withdrawal from employer-sponsored plans during the first year of birth or adoption, without the 10% tax on early withdrawals. It’s important to note the withdrawal will be still be treated as regular income and subject to income tax.
These changes are designed to encourage broader participation and provide additional incentives. At the same time, they may have an impact on an individual’s taxes requiring a second look at tax planning opportunities in 2020. If you have questions about the Act or need assistance with a tax planning or compliance issue, Windham Brannon can help. For additional information call us at 404-898-2000 or click here to contact us. We look forward to assisting you in the future.